Rental real estate can be a great addition to your overall financial plan. If you're considering getting into the rental business, here are a few points of consideration to think through to help in your decision making process.
Understand How This Fits Into Your Plan and Lifestyle
Rental properties are like any other financial investment or insurance: they're just a tool. How does a rental property fit into your financial plan? What goal, purpose, or problem are you solving with a rental property?
How does rental real estate fit into your lifestyle? How comfortable are you with becoming a landlord? Are you OK with receiving phone calls at inconvenient times of the day? Do you enjoy and are you good at property maintenance? Are you comfortable handling potentially difficult situations that may arise with tenants or contractors? Do you have the time and capacity to take on the challenge of being a good landlord or do plan on farming most of that work out to a property management company?
Thinking through the answers to those questions can help point you in the direction of the type of property ownership or if landlording is a good fit for you right now.
Shore Up Your Balance Sheet
Think of your balance sheet like your war chest and as your own built-in insurance policy. There's a couple of key times when having a strong balance sheet is most helpful. The first is when you go to borrow money, such as in the form of a mortgage. The second is in the case something happens in the course of landlording such as an unexpected repair or homeowners' association assessment. Many of these expenses are not optional so you'll need to be ready when surprises pop-up so you're not in a situation to make a short-term decision with a long term consequence such as selling.
Look first at paying down high interest consumer debt such as credit cards and even automobile loans. Eliminating debt will likely help boost your credit score increasing your ability to obtain favorable credit terms.
Having adequate emergency savings and cash reserves is also a top priority. Liquidity is key when you're getting into a relatively illiquid investment like rental properties.
In the similar vein of shoring up your balance sheet, it's a good idea to check on your cash flow. Are you going to be dependent on this property for a significant part of your spending needs or will the cash be reinvested? As noted above, having a strong personal cash flow from other sources, such as employment or a business, can help you weather uncontrollable events such as a soft rental market or the uncomfortable (and hopefully unlikely) event of a tenant eviction.
Do Your Homework
Overall, I like to look at rental properties as the business that it is. Many obstacles can be overcome with a bit of planning and resourcefulness but it's best to remember that if it was easy then everyone would do it and there would be no return for your risk.
If you're considering rentals, let's chat! Schedule a call here.
The above is for general information only. Consult with competent investment, tax, or legal counsel to best understand your unique circumstances before implementing any strategy. There is no assurance that working with a financial professional will improve investment results. All information above is subject to change. Read our firm's disclaimer here: https://www.windingtrailfinancial.com/disclaimer.